Employers who hire and treat an employee as a contractor could face serious penalties as well as claims for super contributions and worker entitlements.

A sham contracting arrangement refers to an employer who deliberately attempts to disguise an employee relationship as an independent contracting arrangement. This type of arrangement is illegal and a breach against the Fair Work Act 2009.

An employer that engages in a sham contracting arrangement is at risk of receiving:

A PAYG withholding penalty (for not deducting tax from worker payments and sending these amounts to the ATO).

A super guarantee charge made up of super guarantee shortfall amounts (which are made up of the amount of super contributions that should have been paid into a complying super fund) and an additional super guarantee charge of up to 200 per cent.

Interest charges.

Administration fee.

Each time an employer hires a worker, it is essential to check if the worker will be considered either a contractor or an employee. The difference between the two will affect how the employer’s obligations i.e., for tax and super.

To avoid sham contracting, ensure you know the difference.

Employee

Contractor

Ability to subcontract/delegate: the worker cannot subcontract/delegate the work – they can’t pay someone else to do the work.

Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.

Basis of payment: the worker is paid either for the time worked, a price per item or activity or commission.

Basis of payment: the worker is paid for a result achieved based on the quote they provided.

Equipment, tools and other assets:

Your business provides all or most of the equipment, tools and other assets required to complete the work, or

The worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the costs.

Equipment, tools and other assets:

The worker provides all or most of the equipment, tools and other assets

The worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.

Commercial risks: the worker takes no commercial risks. Your business is legally responsible.

Control over the work: your business has the right to direct the way in which the worker does their work.

Control over the work: the worker has freedom in the way the work is done, subject to specific terms in any contract or agreement.

Independence: the worker is not operating independently of your business. They work within and are considered part of your business.

Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.